What to know before investing in a Bitcoin IRA

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Updated August 13, 2019: Unless you’ve been floating in a news-proof bubble for the last few years, you’ve heard about cryptocurrency. Digital currencies like Bitcoin, Ethereum and Ripple are hot investments. And while some experts predict the crypto market could soar to $1 trillion in value this year, it's a volatile investment. Case in point: Ripple lost $5 billion in market cap in 24 hours in February. So while you can net awesome returns owning cryptocurrency, you can also lose it all quickly.

It’s one thing to invest in crypto short-term. What about for retirement? Companies like Bitcoin IRA let you roll over funds from an existing retirement account such as your 401(k) into a tax-deferred, cryptocurrency-based individual retirement account.You could potentially earn a small fortune from investing in crypto, but what should you consider before trying Bitcoin IRA? We asked financial experts for advice.

Know the risks

While you can grow your money by purchasing crypto during an initial coin offering, Bitcoin isn’t a true investment like stock in a company, said Larry Ludwig, founder of Investor Junkie. Bitcoin isn't tied to productive assets and generates no income.

It's a form of currency. It's also a bet on the future.

“You’re hoping Bitcoin will be worth more in the future, otherwise known as the ‘Greater Fool Theory,’" said Ludwig. “I’m not against cryptocurrencies or blockchain technology, which I think will have a future, but that doesn’t mean Bitcoin will survive.”

Crypto is a nascent technology. There are more than 1,500 cryptocurrencies listed on CoinMarketCap, a website showing cryptocurrency prices. No one knows which will be the best investment, said Ashley Foster, a certified financial planner with NXT:Gen Financial Planning.

Another risk of owning cryptocurrency: Many trading platforms like Bitcoin IRA aren’t regulated (yet) by the Securities Exchange Commission, a federal agency tasked with protecting investors.

Consider whether you can stomach the risks

You’ll need to gauge whether you’re comfortable with the risks of crypto. If you are an aggressive investor, and volatility won’t freak you out, you might want to consider investing in Bitcoin IRA. Otherwise, it might be better to own crypto in a more liquid account by using a platform such as Coinbase or Binance instead of a retirement account, said Ludwig.

The classic investing rule of not putting your eggs in one basket applies.

“If you really want to invest in cryptos in your retirement account, the prudent thing to do is invest no more than 10% in it,” said Foster. This protects your retirement if the crypto market crashes, or if the currency you purchase does not win out over the hundreds of others available.

Know the fees & penalties

Fees for investing in a Bitcoin IRA run up to 15% of your portfolio. Other cryptocurrency IRAs charge as much as 25%. For Bitcoin IRA, there’s a minimum investment of $20,000. That’s a lot of retirement money to risk for many people.

Know the tax implications

While you get a tax advantage for the potential huge gains in a Bitcoin IRA, as with other retirement accounts, you can't deduct losses without meeting stringent requirements. Plus, any withdrawals before reaching age 59 ½, will cost you a 10% tax. For such a volatile asset, it might be better to invest in cryptocurrency through a taxable brokerage account, said Hui-chin Chen, a certified financial planner at Pavlov Financial Planning. With a taxable account, you can deduct up to $3,000 in losses.

Consider the extra financial housekeeping

Because you’ll need to go through a separate company such as Bitcoin IRA to invest in crypto for your retirement, you won’t be able to house all your retirement funds in one place. You’ll need to keep tabs on IRA contributions to both your Bitcoin IRA and traditional retirement funds, which could be a time suck, said Chen. You’ll run into the same issue when making withdrawals. If you like to see everything in one place, keeping track of multiple retirement accounts may be a sticking point.

Looking for other retirement tools? These apps can help track your retirement accounts.

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